Ecological Economics

Economics is a social science that examines the allocation of scarce resources among various potential uses that are in competition with each other and attempts to predict and understand the patterns of consumption of goods and services by individuals and society. A core assumption of conventional economics is that individuals and corporations seek to maximize their profit within the marketplace.

In conventional economics, the worth of goods or services are judged on the basis of their direct or indirect utility to humans. In almost all cases, the goods and services are assigned value (that is, they are valuated) in units of tradable currency, such as dollars. This is true of: (1) manufactured goods such as televisions, automobiles, and buildings, (2) the services provided by people like farmers, doctors, teachers, and baseball players, and (3) all natural resources that are harvested and processed for use by humans, including nonrenewable resources such as metals and fossil fuels, and renewable resources such as agricultural products, fish, and wood.

Ecological economics differs from conventional economics in attempting to value goods and services in ways that are not only based on their usefulness to humans, that is, in a non-anthropocentric fashion. This means that ecological economics attempts to take into account the many environmental and social costs associated with the depletion of natural resources, as well as the degradation of ecological systems through pollution, extinction, and other environmental damages. Many of these important problems are associated with the diverse economic activities of humans, but the degradation is often not accounted for by conventional economics. From the environmental perspective, the most important problem with conventional economics has been that the marketplace has not recognized the value of important ecological goods and services. Therefore, their degradation has not been considered a cost of doing business. Ecological economics attempts to find ways to consider and account for the real costs of environmental damage.

Humans have an absolute dependence on a continuous flow of natural resources to sustain their economic systems. There are two basic types of natural resources: nonrenewable and renewable. By definition, sustainable economic systems and sustainable human societies cannot be based on the use of non-renewable resources, because these are always depleted by usage, a process referred to as “mining.” Ultimately, sustainable systems can only be supported by the use of renewable resources, which if harvested and managed wisely, can be available forever. Because most renewable resources are the goods and services of ecosystems, economic and ecological systems are highly interdependent.

In theory, renewable natural resources can sustain harvesting indefinitely. However, to achieve a condition of sustainable usage, the rate of harvesting must be smaller than the rate of renewal of the resource. For example, flowing water can produce hydroelectricity or for irrigation as long as the usage does not exceed the capacity of the landscape to yield water.

Similarly, biological natural resources such as trees and hunted fish, waterfowl, and deer can be harvested to yield valuable products, as long as the rate of cropping does not exceed the renewal of the resource. These are familiar examples of renewable resources, partly because they all represent ecological goods and services that are directly important to human welfare, and can be easily valuated in terms of dollars.

Unlike conventional economics, ecological economics also considers other types of ecological resources to be important, even though they may not have direct usefulness to humans, and they are not valuated in dollars. Because the marketplace does not assign value to these resources, they can be degraded without conventional economic cost even though this results in ecological damage and ultimately harms society. Some examples of ecological resources that markets consider to be “free” goods and services include:

(1) Nonexploited species of plants and animals that are not utilized as an economic resource, but are nevertheless important because they may have undiscovered uses to humans (perhaps as new medicines or foods), or are part of the aesthetic environment, or they have intrinsic value that exists even if they are not useful to humans;

(2) Ecological services such as control over erosion, provision of water and nutrient cycling, and cleansing of pollutants emitted into the environment by humans, as occurs when growing vegetation removes carbon dioxide from the atmosphere and when microorganisms detoxify chemicals such as pesticides.

As noted above, sustainable economic systems can only be based on the wise use of renewable resources.

However, the most common way in which humans have used potentially renewable resources is by “overharvesting,” that is, exploitation that exceeds the capacity for renewal so that the stock is degraded and sometimes made extinct. In other words, most use of potentially renewable resources has been by mining, or use as if it were a nonrenewable resource.

There are many cases of the mining and degradation of potentially renewable resources, from all parts of the world and from all human cultures. In a broad sense, this syndrome is represented by extensive deforestation, collapses of wild fisheries, declines of agricultural soil capability, and other resource degradations. The extinctions of the dodo, great auk, Steller’s sea cow, and passenger pigeon all represent overhunting so extreme that it took potentially renewable resources to biological extinction.

The overhunting of the American bison and various species of seals and whales all represent biological mining that took potentially renewable resources beyond the brink of economic extinction, so that it was no longer profitable to exploit the resource.

These and many other cases of the degradation of renewable resources occurred because conventional economics did not value resource degradation properly. Consequently, profit was only determined on the basis of costs directly associated with catching and processing the resource, and not on the costs of renewal and depletion. Similarly, conventional economics considers non-valuated goods and services such as biodiversity, soil conservation, erosion control, water and nutrient cycling, and cleansing air and water of pollutants to be free resources so that no costs are associated with their degradation.

The challenge of ecological economics is to design systems of resource harvesting and management that are sustainable, so that human society can be supported forever without degrading the essential, ecological base of support.

Ecologically sustainable systems must sustain two clusters of values: (1) the health of economically valuated, renewable resources, such as trees, fish, and agricultural soil capability, and (2) acceptable levels of ecological goods and services that are not conventionally valuated. Therefore, a truly sustainable system must be able to yield natural resources that humans need, and to provide that sustenance forever. However, the system must also provide services related to clean air and water and nutrient cycling, while also sustaining habitat for native species and their natural ecological communities.

To achieve this goal, ecologically sustainable systems will have to be based on two ways of managing ecosystems: (1) as working ecosystems, and (2) as ecological reserves (or protected areas). The “working ecosystems” will be harvested and managed to yield sustainable flows of valuated resources, such as forest products, hunted animals, fish, and agricultural commodities. However, some environmental costs will be associated with these uses of ecosystems.

For example, although many species will find habitats available on working lands to be acceptable to their purposes, other native species and most natural communities will be at risk on working landscapes. To sustain the ecological values that cannot be accommodated by working ecosystems, a system of ecological reserves will have to be developed. These reserves must be designed to ensure that all native species are sustained at viable population levels, that there are viable areas of natural ecosystems, and that ecosystems will be able to supply acceptable levels of important services, such as control of erosion, nutrient cycling, and cleansing the environment of pollution.

So far, ecologically sustainable systems of the sort described above are no more than a concept: None exist today. In fact, humans mostly exploit the potentially renewable goods and services of ecosystems in a nonsustainable fashion. Clearly this is a problem, because humans rely on these resources to sustain their economy. Ecological economics provides a framework for the design of better, ecologically sustainable systems of resource use. However, it remains to be seen whether human society will be wise enough to adopt these sustainable methods of organizing their economy and their interactions with ecosystems.

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Ecological Economics

Environmental Encyclopedia
COPYRIGHT 2003 The Gale Group Inc.

Ecological economics

Although ecology and economics share the common root "eco-" (from Greek Oikos or household), these disciplines have tended to be at odds with each other in recent years over issues such as the feasibility of continued economic growth and the value of natural resources and environmental services.

Economics deals with resource allocation or trade-offs between competing wants and needs. Economists ask, "what shall we produce, for whom, or for what purpose?" Furthermore, they ask, "when and in what manner should we produce these goods and services?" In mainstream, neoclassical economics, these questions are usually limited to human concerns: what will it cost to obtain the things we desire and what benefits will we derive from them?

According to classical economists, the costs of goods and services are determined by the interaction of supply and demand in the marketplace. If the supply of a particular commodity or service is high but the demand is low, the price will be low. If the commodity is scarce but everyone wants it, the price will be high. But high prices also encourage invention of new technology and substitutes that can satisfy the same demands. The cyclic relationship of scarce resources and development of new technology or new materials, in this view, allows for unlimited growth. And continued economic growth is seen as the best, perhaps the only, solution to poverty and environmental degradation .

Ecologists, however, view the world differently than economists. From their studies of the interactions between organisms and their environment , ecologists see our world as a dynamic, but finite system that can support only a limited number of humans with their demands for goods and services. Many ecological processes and the nonrenewable natural resources on which our economy is based have no readily available substitutes. Further, much of the natural world is being degraded or depleted at unsustainable rates. Ecologists criticize the narrow focus of conventional economics and its faith in unceasing growth, market valuation, and endless substitutability. Ecologists warn that unless we change our patterns of production and consumption to ways that protect natural resources and ecological systems, we will soon be in deep trouble.

Ecological economics

Ecological or environmental economics is a relatively new field that introduces ecological understanding into our economic discourse. It takes a transdisciplinary, holistic, contextual, value-sensitive approach to economic planning and resource allocation. This view recognizes our dependence on the natural world and the irreplaceable life-support services it renders. Rather than express values solely in market prices, ecological economics pays attention to intangible values, nonmarketed resources, and the needs and rights of future generations and other species . Issues of equitable distribution of access to resources and the goods and services they provide need to be solved, in this perspective, by means other than incessant growth.

Where neoclassical economics sees our environment as simply a supply of materials, services, and waste sinks, ecological economics regards human activities as embedded in a global system that places limits on what we can and cannot do. Uncertainty and dynamic change are inherent characteristics of this complex natural system. Damage caused by human activities may trigger sudden and irreversible changes. The precautionary principle suggests that we should leave a margin for error in our use of resources and plan for adaptive management policies.

Natural capital

Conventional economists see wealth generated by human capital (human knowledge, experience, and enterprise) working with manufactured capital (buildings, machines, and infrastructure) to transform raw materials into useful goods and services. In this view, economic growth and efficiency are best accomplished, by increasing the throughput of raw materials extracted from nature . Until they are transformed by human activities, natural resources are regarded as having little value. In contrast, ecological economists see natural resources as a form of capital equally important with human-made capital. In addition to raw materials such as minerals, fuels, fresh water, food, and fibers, nature provides valuable services on which we depend. Natural systems assimilate our wastes and regulate the earth's energy balance, global climate , material recycling , the chemical composition of the atmosphere and oceans, and the maintenance of biodiversity . Nature also provides aesthetic, spiritual, cultural, scientific and educational opportunities that are rarely given a monetary value but are, nevertheless, of great significance to many of us.

Ecological economists argue that the value of natural capital should be taken into account rather than treated as a set of unimportant externalities. Our goal, in this view, should be to increase our efficiency in natural resource use and to reduce its throughput. Harvest rates for renewable resources (those like organisms that regrow or those like fresh water that are replenished by natural processes) should not exceed regeneration rates. Waste emissions should not exceed the ability of nature to assimilate or recycle those wastes. Nonrenewable resources (such as minerals) may be exploited by humans, but only at rates equal to the creation of renewable substitutes.

Accounting for natural capital

Where neoclassical economics seeks to maximize present value of resources, ecological economics calls for recognition of the real value of those resources in calculating economic progress. A market economist, for example, once argued that the most rational management policy for whales was to harvest all the remaining ones immediately and to invest the proceeds in some profitable business. Whales reproduce too slowly, he claimed, and are too dispersed to make much money in the long run by allowing them to remain wild. Ecologists reject this limited view of whales as only economic units of production. They see many other values in these wild, beautiful, sentient creatures. Furthermore whales may play important roles in marine ecology that we don't yet fully understand.

Ecologists are similarly critical of Gross National Product (GNP) as a measure of national progress or wellbeing. GNP measures only the monetary value of goods and services produced in a national economy. It doesn't attempt to distinguish between economic activities that are beneficial or harmful. People who develop cancer from smoking, for instance, contribute to the GNP by running up large hospital bills. The pain and suffering they experience doesn't appear on the balance sheets. When calculating GNP in conventional economics, a subtraction is made, for capital depreciation in the form of wear and tear on machines, vehicles, and buildings used in production, but no account is made for natural resources used up or ecosystems damaged by that same economic activity.

Robert Repeto of the World Resources Institute estimates that soil erosion in Indonesia reduces the value of crop production about 40% per year. If natural capital were taken into account, total Indonesian GNP would be reduced by at least 20% annually. Similarly, Costa Rica experienced impressive increases in timber, beef, and banana production between 1970 and 1990. But decreased natural capital during this period represented by soil erosion, forest destruction, biodiversity losses, and accelerated water runoff add up to at least $4 billion, or about 25%, of annual GNP. Ecological economists call for a new System of National Accounts that recognizes the contribution of natural capital to economic activity.

Valuation of natural capital

Ecological economics requires new tools and new approaches to represent nature in GNP. Some categories in which natural capital might fit include:

use values: the price we pay to use or consume a resource

option value: preserving options for the future

existence value: those things we like to know still exist even though we may never use or even see them

aesthetic value: things we appreciate for their beauty

cultural value: things important for cultural identity

scientific and educational value: information or experience-rich aspects of nature.

How can we measure this value of natural resources and ecological services not represented in market systems? Ecological economists often have to resort to "shadow pricing" or other indirect valuation methods for natural resources. For instance, what is the worth of a day of canoeing on a wild river ? We might measure opportunity costs such as how much we pay to get to the river or to rent a canoe. The direct out-of-pocket costs might represent only a small portion, however, of what it is really worth to participants. Another approach is contingent valuation in which potential resource users are asked, "how much would you be willing to pay for this experience?" or "what price would you be willing to accept to sell your access or forego this opportunity?" These approaches are controversial because people may report what they think they ought to pay rather than what they would really pay for these activities.

Carrying capacity and sustainable ddevelopment

Carrying capacity is the maximum number of organisms of a particular species that a given area can sustainably support. Where neoclassical economists believe that technology can overcome any obstacle and that human ingenuity frees us from any constraints on population or economic growth, ecological economists argue that nature places limits on us just as it does on any other species.

One of the ultimate limits we face is energy. Because of the limits of the second law of thermodynamics, whenever work is done, some energy is converted to a lower quality, less useful form and ultimately is emitted as waste heat. This means that we require a constant input of external energy. Many fossil fuel supplies are nearing exhaustion, and continued use of these sources by current technology carries untenable environmental costs. Vast amounts of solar energy reach the earth, and this solar energy already drives the generation of all renewable resources and ecological services. By some calculations, humans now control or directly consume about 40% of all the solar energy reaching the earth. How much more can we monopolize for our own purposes without seriously jeopardizing the integrity of natural systems for which there is no substitute? And even if we had an infinite supply of clean, renewable energy , how much heat can we get rid of without harming our environment?

Ecological economics urges us to restrain growth of both human populations and the production of goods and services in order to conserve natural resources and to protect remaining natural areas and biodiversity. This does not necessarily mean that the billion people in the world who live in absolute poverty and cannot, on their own, meet the basic needs for food, shelter, clothing, education, and medical care are condemned to remain in that state. Ecological economics calls for more efficient use of resources and more equitable distribution of the benefits among those now living as well as between current generations and future ones.

A mechanism for attaining this goal is sustainable development , that is, a real improvement in the overall welfare of all people on a long-term basis. In the words of the World Commission on Economy and Development, sustainable development means "meeting the needs of the present without compromising the ability of future generations to meet their own needs." This requires increased reliance on renewable resources in harmony with ecological systems in ways that do not deplete or degrade natural capital. It doesn't necessarily mean that all growth must cease. There are many human attributes such as knowledge, kindness, compassion, cooperation, and creativity that can expand infinitely without damaging our environment. While ecological economics offers a sensible framework for approaches to resource use that can be in harmony with ecological systems over the long term, it remains to be seen whether we will be wise enough to adopt this framework before it is too late.

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Environmental Economics

Environmental economics is a relatively new field, but its roots go back to the end of the nineteenth century when economists first discussed the problem of externality . Economic transactions have external effects which are not captured by the price system. Prime examples of these externalities are air pollution and water pollution . The absence of a price for nature's capacity to absorb wastes has an obvious solution in economic theory. Economists advocate the use of surrogate prices in the form of pollution taxes and discharge fees. The non-priced aspect of the transaction then has a price, which sends a signal to the producers to economize on the use of the resource.

In addition to the theory of externalities, economists have recognized that certain goods, such as those provided by nature , are common property. Lacking a discrete owner, they are likely to be over-utilized. Ultimately, they will be depleted. Few will be left for future generations , unless common property goods like the air and water are protected.

Besides pollution taxes and discharge fees, economists have explored the use of marketable emission permits as a means of rectifying the market imperfection caused by pollution. Rather than establishing a unit charge for pollution, government would issue permits equivalent to an agreed-upon environmental standard. Holders of the permits would have the right to sell them to the highest bidder. The advantage of this system, wherein a market for pollution rights has been established, is that it achieves environmental quality standards. Under a charge system, trial-and-error tinkering would be necessary to achieve the standards.

Besides discharge fees and markets for pollution rights, economists have advocated the use of cost-benefit analysis in environmental decision making. Since control costs are much easier to measure than pollution benefits, economists have concentrated on how best to estimate the benefits of a clean environment . They have relied on two primary means of doing so. First, they have inferred from the actual decisions people make in the marketplace what value they place on a clean and healthy environment. Second, they have directly asked people to make trade-off choices. The inference method might rely on residential property values, decomposing the price of a house into individual attributes including air quality , or it might rely on the wage premium risky jobs enjoy. Despite many advances, the problem of valuing environmental benefits continues to be controversial with special difficulties surrounding the issues of quantifying the value of a human life, recreational benefits, and ecological benefits including species and habitat survival.

For instance, the question of how much a life is worth is repellent and absurd since human worth cannot be truly captured in monetary terms. Nonetheless it is important to determine the benefits for cost-benefit purposes. The costs of reducing pollution often are immediate and apparent, while the benefits are far-off and hard to determine. So, it is important to try to gauge what these benefits might be worth.

Economists call for a more rational ordering of risks. The funds for risk reduction are not limitless, and the costs keep mounting. Risks should be viewed in a detached and analytical way. Polls suggest that Americans worry most about such dangers as oil spills , acid rain , pesticides, nuclear power , and hazardous wastes, but scientific risk assessments show that these are only low or medium-level dangers. The greater hazards come from radon , lead , indoor air pollution, and fumes from chemicals such as benzene and formaldehyde. Radon, the odorless gas that naturally seeps up from the ground and is found in people's homes, causes as many as 20,000 lung cancer deaths per year, while hazardous waste dumps cause at most 500 cancer deaths. Yet the Environmental Protection Agency (EPA) spends over $6 billion a year to clean up hazardous waste sites while its spends only $100 million a year for radon protection. To test a home for radon costs about $25, and to clean it up if it is found contaminated costs $1,000. To make the entire national housing stock free from radon would cost a few billion dollars. In contrast, projected spending for cleaning up hazardous waste sites is likely to exceed $500 billion despite the fact that only about 11 percent of such sites pose a measurable risk to human health.

Greater rationality would mean that less attention would be paid to some risks and more attention to others. For instance, scientific risk assessment suggests that sizable new investments will be needed to address the dangers of ozone layer depletion and greenhouse warming. Ozone depletion is likely to result in 100,000 more cases of skin cancer by the year 2050. Global warming has the potential to cause massive catastrophe.

For businesses, risk assessment provides a way to allocate costs efficiently. They are increasingly using it as a management tool. To avoid another accident like Bhopal, India , Union Carbide has set up a system by which it rates its plants "safe," "made safer," or "shut down." Environmentalists, on the other hand, generally see risk assessment as a tactic of powerful interests used to prevent regulation of known dangers or permit building of facilities where there will be known fatalities. Even if the chances of someone contracting cancer and dying is only one in a million, still someone will perish, which the studies by risk assessors indeed document. Among particularly vulnerable groups of the population (allergy sufferers exposed to benzene for example) the risks are likely to be much greater, perhaps as great as one fatality for every 100 persons. Environmentalists conclude that the way economists present their findings is too conservative. By treating everyone alike, they overlook the real danger to particularly vulnerable people. Risk assessment should not be used as an excuse for inaction.

Environmentalists have also criticized environmental economics for its emphasis on economic growth without considering the unintended side-effects. Economists need to supplement estimates of the economic costs and benefits of growth with estimates of the effects of that growth that cannot be measured in economic terms. Many environmentalists also believe that the burden of proof should rest with new technologies, in that they should not be allowed simply because they advance material progress. In affluent societies especially, economic expansion is not necessary.

Growth is promoted for many reasons to restore the balance of payments, to make the nation more competitive, to create jobs, to reduce the deficit, to provide for the old and sick, and to lessen poverty. The public is encouraged to focus on statistics on productivity, balance of payments, and growth, while ignoring the obvious costs. Environmental groups, on the other hand, have argued for a steady-state economy in which population and per capita resource consumption stabilize. It is an economy with a constant number of people and goods, maintained at the lowest feasible flows of matter and energy. Human services would play a large role in a steady-state economy because they do not require much energy or material throughput and yet contribute to economic growth. Environmental clean-up and energy conservation also would contribute, since they add to economic growth while also having a positive effect on the environment.

Growth can continue, according to environmentalists, but only if the forms of growth are carefully chosen. Free time, in addition, would have to be a larger component of an environmentally-acceptable future economy. Free time removes people from potentially harmful production. It also provides them with the time needed to implement alternative production processes and techniques, including organic gardening , recycling , public transportation , and home and appliance maintenance for the purposes of energy conservation .

Another requirement of an environmentally acceptable economy is that people accept a new frugality, a concept that also has been labeled joyous austerity, voluntary simplicity, and conspicuous frugality.

Economists represent the environment's interaction with the economy as a materials balance model. The production sector, which consists of mines and factories, extracts materials from nature and processes them into goods and services. Transportation and distribution networks move and store the finished products before they reach the point of consumption. The environment provides the material inputs needed to sustain economic activity and carries away the wastes generated by it. People have long recognized that nature is a source of material inputs to the economy, but they have been less aware that the environment plays an essential role as a receptacle for society's unwanted by-products. Some wastes are recovered by recycling, but most are absorbed by the environment. They are dumped in landfills, treated in incinerators, and disposed of as ash. They end up in the air, water, or soil .

The ultimate limits to economic growth do not come only from the availability of raw materials from nature. Na ture's limited capacities to absorb wastes also set a limit on the economy's ability to produce. Energy plays a role in this process. It helps make food, forest products, chemicals, petroleum products, metals, and structural materials such as stone, steel, and cement. It supports materials processing by providing electricity, heating, and cooling services. It aids in transportation and distribution. According to the law of the conservation of energy, the material inputs and energy that enter the economy cannot be destroyed. Rather they change form, finding their way back to nature in a disorganized state as unwanted and perhaps dangerous by-products.

Environmentalists use the laws of physics (the notion of entropy) to show how society systematically dissipates low entropy, highly concentrated forms of energy by converting it to high entropy, little concentrated waste that cannot be used again except at very high cost. They project current resource use and environmental degradation into the future to demonstrate that civilization is running out of critical resources. The earth cannot tolerate additional contaminants. Human intervention in the form of technological innovation and capital investment complemented by substantial human ingenuity and creativity is insufficient to prevent this outcome unless drastic steps are taken soon. Nearly every economic benefit has an environmental cost, and the sum total of the costs in an affluent society often exceed the benefits. The notion of carrying capacity is used to show that the earth has a limited ability to tolerate the disposal of contaminants and the depletion of resources.

Economists counter these claims by arguing that limits to growth can be overcome by human ingenuity, that benefits afforded by environmental protection have a cost, and that government programs to clean up the environment are as likely to fail as the market forces that produce pollution. The traditional economic view is that production is a function of labor and capital and, in theory, that resources are not necessary since labor and/or capital are infinitely substitutable for resources. Impending resource scarcity results in price increases which lead to technological substitution of capital, labor, or other resources for those that are in scarce supply. Price increases also create pressures for efficiency-in-use, leading to reduced consumption. Thus, resource scarcity is reflected in the price of a given commodity. As resources become scarce, their prices rise accordingly. Increases in price induce substitution and technological innovation.

People turn to less scarce resources that fulfill the same basic technological and economic needs provided by the resources no longer available in large quantities. To a large extent, the energy crises of the 1970s (the 1973 price shock induced by the Arab oil embargo and 1979 price shock following the Iranian Revolution) were alleviated by these very processes: higher prices leading to the discovery of additional supply and to conservation. By 1985, energy prices in real terms were lower than they were in 1973.

Humans respond to signals about scarcity and degradation. Extrapolating past consumption patterns into the future without considering the human response is likely to be a futile exercise, economists argue. As far back as the end of the eighteenth century, thinkers such as Thomas Malthus have made predictions about the limits to growth, but the lesson of modern history is one of technological innovation and substitution in response to price and other societal signals, not one of calamity brought about by resource exhaustion. In general, the prices of natural resources have been declining despite increased production and demand. Prices have fallen because of discoveries of new resources and because of innovations in the extraction and refinement process.

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Ecological Economics

The Gale Encyclopedia of Science
COPYRIGHT 2008 The Gale Group, Inc.

Ecological economics

Conventional and ecological economics

Economics is conventionally considered to be a social science that examines the allocation of scarce resources among various potential uses that are in competition with each other. As such, economics attempts to predict and understand the patterns of consumption of goods and services by individuals and society. A core assumption of conventional economics is that individuals and corporations seek to maximize their profit within the marketplace.

In conventional economics, the worth of goods or services are judged on the basis of their direct or indirect utility to humans. In almost all cases, the goods and services are assigned value (that is, they are valuated) in units of tradable currency, such as dollars. This is true of: (1) manufactured goods such as televisions, automobiles, and buildings, (2) the services provided by people like farmers, doctors, teachers, and baseball players, and (3) all natural resources that are harvested and processed for use by humans, including nonrenewable resources such as metals and fossil fuels , and renewable resources such as agricultural products, fish , and wood .

Ecological economics differs from conventional economics in attempting to value goods and services in ways that are not only based on their usefulness to humans, that is, in a non-anthropocentric fashion. This means that ecological economics attempts to take into account the many environmental and social costs associated with the depletion of natural resources, as well as the degradation of ecological systems through pollution , extinction , and other environmental damages. Many of these important problems are associated with the diverse economic activities of humans, but the degradation is often not accounted for by conventional economics. From the environmental perspective, the most important problem with conventional economics has been that the marketplace has not recognized the value of important ecological goods and services. Therefore, their degradation has not been considered a cost of doing business. Ecological economics attempts to find ways to consider and account for the real costs of environmental damage.

Ecological goods and services

Humans have an absolute dependence on a continuous flow of natural resources to sustain their economic systems. There are two basic types of natural resources: nonrenewable and renewable. By definition, sustainable economic systems and sustainable human societies cannot be based on the use of nonrenewable resources, because these are always depleted by usage, a process referred to as "mining." Ultimately, sustainable systems can only be supported by the use of renewable resources, which if harvested and managed wisely, can be available forever. Because most renewable resources are the goods and services of ecosystems, economic and ecological systems are highly interdependent.

Potentially, renewable natural resources can sustain harvesting indefinitely. However, to achieve a condition of sustainable usage, the rate of harvesting must be smaller than the rate of renewal of the resource. For example, flowing water can be sustainably used to produce hydroelectricity or for irrigation , as long as the usage does not exceed the capacity of the landscape to yield water. Similarly, biological natural resources such as trees and hunted fish, waterfowl, and deer can be sustainably harvested to yield valuable products, as long as the rate of cropping does not exceed the renewal of the resource. These are familiar examples of renewable resources, partly because they all represent ecological goods and services that are directly important to human welfare, and can be easily valuated in terms of dollars.

Unlike conventional economics, ecological economics also considers other types of ecological resources to be important, even though they may not have direct usefulness to humans, and they are not valuated in dollars. Because the marketplace does not assign value to these resources, they can be degraded without conventional economic cost even though this results in ecological damage and ultimately harms society. Some examples of ecological resources that markets consider to be "free" goods and services include:

non-exploited species of plants and animals that are not utilized as an economic resource, but are nevertheless important because they may have undiscovered uses to humans (perhaps as new medicines or foods), or are part of the aesthetic environment, or they have intrinsic value which exists even if they are not useful to humans;

ecological services such as control over erosion , provision of water and nutrient cycling, and cleansing of pollutants emitted into the environment by humans, as occurs when growing vegetation removes carbon dioxide from the atmosphere and when microorganisms detoxify chemicals such as pesticides .

Use of renewable resources by humans

As noted above, sustainable economic systems can only be based on the wise use of renewable resources. However, the most common way in which humans have used potentially renewable resources is by "overharvesting," that is, exploitation that exceeds the capacity for renewal so that the stock is degraded and sometimes made extinct. In other words, most use of potentially renewable resources has been by mining , or use as if it were a nonrenewable resource.

There are many cases of the mining and degradation of potentially renewable resources, from all parts of the world and from all human cultures. In a broad sense, this syndrome is represented by extensive deforestation , collapses of wild fisheries, declines of agricultural soil capability, and other resource degradations. The extinctions of the dodo, great auk, Steller's sea cow, and passenger pigeon all represent overhunting so extreme that it took potentially renewable resources beyond the brink of biological extinction. The overhunting of the American bison and various species of seals and whales all represent biological mining that took potentially renewable resources beyond the brink of economic extinction, so that it was no longer profitable to exploit the resource.

These and many other cases of the degradation of renewable resources occurred because conventional economics did not value resource degradation properly. Consequently, profit was only determined on the basis of costs directly associated with catching and processing the resource, and not on the costs of renewal and depletion. Similarly, conventional economics considers non-valuated goods and services such as biodiversity , soil conservation , erosion control, water and nutrient cycling, and cleansing air and water of pollutants to be free resources so that no costs are associated with their degradation.

Ecologically sustainable systems

The challenge of ecological economics is to design systems of resource harvesting and management that are sustainable, so that human society can be supported forever without degrading the essential, ecological base of support.

Ecologically sustainable systems must sustain two clusters of values: (1) the health of economically valuated, renewable resources, such as trees, fish, and agricultural soil capability, and (2) acceptable levels of ecological goods and services that are not conventionally valuated. Therefore, a truly sustainable system must be able to yield natural resources that humans need, and to provide that sustenance forever. However, the system must also provide services related to clean air and water and nutrient cycling, while also sustaining habitat for native species and their natural ecological communities.

To achieve this goal, ecologically sustainable systems will have to be based on two ways of managing ecosystems: (1) as working ecosystems, and (2) as ecological reserves (or protected areas). The "working ecosystems" will be harvested and managed to yield sustainable flows of valuated resources, such as forest products, hunted animals, fish, and agricultural commodities. However, some environmental costs will be associated with these uses of ecosystems. For example, although many species will find habitats available on working lands to be acceptable to their purposes, other native species and most natural communities will be at risk on working landscapes. To sustain the ecological values that cannot be accommodated by working ecosystems, a system of ecological reserves will have to be developed. These reserves must be designed to ensure that all native species are sustained at viable population levels, that there are viable areas of natural ecosystems, and that ecosystems will be able to supply acceptable levels of important services, such as control of erosion, nutrient cycling, and cleansing the environment of pollution.

So far, ecologically sustainable systems of the sort described above are no more than a concept. None exist today. In fact, humans mostly exploit the potentially renewable goods and services of ecosystems in an nonsustainable fashion. Clearly this is a problem, because humans rely on these resources to sustain their economy. Ecological economics provides a framework for the design of better, ecologically sustainable systems of resource use. However, it remains to be seen whether human society will be wise enough to adopt these sustainable methods of organizing their economy and their interactions with ecosystems.

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Ecological Economics

ECOLOGICAL ECONOMICS

Economics is frequently defined as the science of the allocation of scarce resources among alternative desirable ends. The first question this implies—What are the desired ends?—is ultimately a question of values and ethics. Most economists would agree that while the ultimate desired end is too difficult to define, increasing social welfare serves as a reasonable placeholder. Seeking to establish itself as an objective, value-free science, mainstream (neoclassical) economics strives to maximize welfare as measured by the dollar value of market goods plus the imputed dollar value of nonmarket goods and services produced. Therefore neoclassical economists, including natural resource and environmental economists, devote most of their attention to markets, which under certain strict conditions efficiently allocate resources toward uses that maximize dollar values. Taking an explicitly ethical position, ecological economics asserts that ecological sustainability and just distribution take priority over efficient allocation as prerequisites to increasing social welfare. Markets cannot be relied upon unless these first two priorities have been met.

Once the desired ends have been determined, ecological economists rely on insights from physics and ecology to assess the nature of the scarce resources. Only then do they seek appropriate allocative mechanisms, drawing from mainstream economics as well as other social sciences. Ecological economics embraces the full complexity of the economic question, and the full range of inquiry necessary to answer it. It lays no claim to being a value-free science, but rather works to be a transdisciplinary field, integrating knowledge and skills from both the humanities and sciences. (Costanza, Daly, and Bartholomew 1991; Norgaard 1989).

As an emerging transdiscipline, ecological economics has an exceptionally broad scope of inquiry, and has not yet achieved the level of consensus that characterizes an established science. This overview leaves out much brilliant work, and not all ecological economists will agree with all it says.

The Resources of Nature and the Nature of Resources

An understanding of scarce resources begins with hard science and the laws of thermodynamics. The first law states that the quantity of matter-energy cannot be created or destroyed and remains constant in a closed system. Everything produced by humans (human-made capital) must come from raw materials supplied by nature (natural capital). Any waste produced by the economy must return to the ecosystem. In contrast, most standard microeconomics textbooks argue that through specialization and trade, society can "increase production with no change in resources" (Parkin 2003, p. 42).

The second law of thermodynamics states that entropy never decreases in an isolated system. From the perspective of economics, entropy can be thought of as a measure of used-up-ness, or the extent to which the capacity of matter-energy to perform work or be useful has been exhausted. When oil is burned to run an engine or heat a house, the energy it contains is not destroyed in performing this work, but it cannot be used again for the same purpose. When the steel in cars rusts and flakes off, it does not disappear but is scattered about the ecosystem so randomly one cannot gather it back up. The quantity of matter-energy is constant in a system, but the quality is constantly deteriorating. These laws suggest that human-made capital will inevitably be used up or worn out and return to the ecosystem as high entropy waste. A constant flow of low entropy natural capital is required simply to maintain the economy.

Fortunately the Earth is not an isolated system, because the sun provides a daily source of low entropy energy. But it is this solar inflow that limits the physical size of the economy in the long run, not the nonrenewable stock of fossil fuels. While fossil fuels can be used up as quickly as one chooses, solar energy comes at a fixed rate. People can therefore use fossil fuels to achieve rapid physical growth of the economic system, but not to create a sustainable system (Georgescu-Roegen 1971).

Humans depend not only on raw materials provided by nature, but like all other species on the planet, are sustained by the solar-powered life support functions of healthy ecosystems. All of human technology simply cannot provide the climate stability, waste absorption capacity, water regulation, and other essentials that more than 6 billion people require to survive. In other words, natural capital has two components. Ecosystem goods are the raw materials provided by nature, as well as the structural components of the ecosystem. Ecosystem services are the valuable functions that emerge when those structural components interact in a complex ecosystem to create a whole greater than the sum of the parts. When humans remove low entropy raw materials from nature to build the economy and return high entropy waste, they must pay an opportunity cost measured in both ecosystem goods and services lost.

These laws of thermodynamics are responsible for the core vision of ecological economists: The human system is sustained and contained by the global ecosystem. When the physical size of the economic system increases, it does not expand into a void, but must instead consume and displace the natural capital on which humans depend for survival (Daly and Farley 2003).

Scale, Distribution, and Allocation

As a consequence of the ecological economists' core vision, their primary concern is with scale—the physical size of the human economy relative to the ecosystem that contains and sustains it. The scale of the economy cannot exceed the capacity of the ecosystem to sustain it. This priority emerges from an understanding of the laws of physics combined with an ethical responsibility to future generations.

Sustainable scale is necessary, but inadequate. Virtually all economists accept the law of diminishing marginal utility—the more one has of something, the less an additional unit is worth. As human-made capital increases, its marginal utility diminishes. A corollary is the law of increasing opportunity costs—as natural capital dwindles, the opportunity costs of continued losses increase. Increasing opportunity costs must eventually surpass diminishing marginal utility. At this point, an economic system has reached its optimal scale, and the physical growth of the economy should stop—though economic development, as measured by improvements in social welfare, can still continue.

Two hundred years ago when market economies were emerging, human-made capital was relatively scarce and natural capital abundant. Economists logically focused on allocating the former. In the early twenty-first century, however, it is natural capital that constrains economic development. If people need more fish or timber, the problem is depleted fish stocks and forests, not a shortage of boats or chainsaws. It is likely that humans have exhausted nearly half the planet's supply of conventional petroleum in less than 150 years (Campbell and Laherrère 1998), threatening to destabilize the global climate in the process. Yet natural capital does not increase in fecundity or quantity in response to an increase in price—the driving force behind markets.

However while natural capital does not respond to price signals, technology does: As a resource becomes scarce, its price goes up, and people can either use it more efficiently or create a substitute, leading many conventional economists to conclude that resource scarcity imposes no limits on economic growth. At one extreme, economists such as Julian Simon deny that natural resources are finite and argue that a growing human population brings more brainpower to solve society's problems (Simon 1996). Similar claims from statistician Bjørn Lomborg (2001), supposedly based on evaluation of empirical data, have received considerable publicity, but the quality of his scholarship raises serious concerns (Rennie 2002). For example, he accepts without question a doubling and even tripling of estimated oil reserves in several member states of the Organization of the Oil Exporting Countries (OPEC) that took place shortly before their quota negotiations in 1988, while rejecting as implausible four out of five scenarios for climate change from an intensively peer-reviewed report by leading scientists working with the International Protocol on Climate Change (Schneider 2002). Nonetheless more credible technological optimists such as Amory Lovins are actively creating pollution reducing, resource and energy efficient technologies such as the hydrogen powered hyper-car.

While not denying its importance, ecological economists are leery of undue faith in technological advance for both practical and ethical reasons. In practical terms few ecosystem services even have a price to signal market scarcity and thus induce technological innovation, and even imputed prices cannot capture the fact that most ecosystem services do not have clear substitutes (Gowdy 1997). While there is a greater capacity to develop substitutes for ecosystem goods than for services, efficiency improvements have physical limits, and continued economic growth must eventually lead to more resource use, more waste output, and diminishing marginal utility—a growing fleet of hyper-cars will still require more roads and parking lots and induce more traffic jams. The fact is that efficiency in resource use rarely stimulates frugality, but frugality quite often stimulates efficiency (Daly and Farley 2003). From the viewpoint of ethics, no one can say for certain what technologies will emerge and when, and the gamble is whether or not future technologies will create substitutes for critical resources before they are exhausted. Ecological economists weigh the gains from winning against the costs of losing. If the technological optimists are wrong, continued increases in the rate of resource use could lead to the irreversible loss of vital ecosystem life support functions. If the optimists are right, then limiting resource extraction and waste emissions will impose only short term costs to standards of living while technological innovation develops substitutes.

Thus ecological economists operate on the assumption that natural capital has become the scarcest resource required to achieve the desired ends, and recognize that markets fail to respond to this scarcity and cannot be relied on as a mechanism for determining desirable scale. Environmental economists in contrast believe markets can determine desirable scale if they calculate the dollar value of ecosystem services then feed this information back into the market system. However all economic production degrades ecosystem services through resource extraction and again through waste emissions. Two prices must be calculated for every price the market detects. This defeats the whole purpose of a market whose virtue is its reliance on decentralized information. Ecological economists believe scale should be determined by a participatory democratic process informed by appropriate experts and the ethical values of citizens. Stakes are high, decisions are urgent, and facts are uncertain. Society must act quickly, but should err on the side of caution and leave room to adapt as it learns more (Funtowicz and Ravetz 1992; Prugh, Costanza, and Daly 2000). The Endangered Species, Clean Air, and Clean Water acts in the United States and the Montreal Protocol on ozone depleting substances are only a few examples of this approach. In sum, while environmental economists in contrast strive to calculate prices first, and then allow scale to adjust, ecological economists strive to determine the desirable scale first, and then allow prices to adjust.

The second priority for ecological economists is just distribution, which emerges in part from their concern with scale. What ethical system would allow a concern for the welfare of people not yet born, and ignore the welfare of those alive and suffering today? If a finite planet imposes finite limits on the size of the economy, then society cannot grow its way out of poverty, and alleviating poverty requires redistribution. On practical grounds, no one living in poverty can really afford to think about the future—hungry people around the world will sacrifice essential natural capital for immediate needs. Unjust distribution is therefore incompatible with ecological sustainability.

How markets allocate resources depends on the initial distribution. For example, a society with highly unequal distribution will allocate resources toward both slums and yachts, while one with more equal distribution will allocate resources toward neither. A given market allocation is therefore no more desirable than the initial distribution that produced it. Nonetheless the tradition in neoclassical economics is to leave the distribution question to other disciplines or policymakers, while ecological economists consider just distribution a prerequisite to desirable allocation.

Distribution should also be decided by a participatory democratic process. Three principles can guide the decision. Wealth created by nature and society as a whole should be equally distributed. Those who degrade that wealth, through pollution or resource depletion, for example, should compensate society for its loss. Those who benefit from society should provide compensation in proportion to their gains.

The third priority for ecological economists is efficiency. Once society has ensured the preservation of enough natural capital to sustain the system, and that remaining resources are justly distributed, those resources should be allocated toward uses that generate as much welfare as possible. Markets can be an efficient allocative mechanism when resources are privately owned, use by one person precludes used by another, and production and consumption have minimal impacts on others. When these conditions do not hold, markets alone will fail to generate efficient outcomes, and society must again rely on participatory democratic decision making to allocate resources, complemented when appropriate by market mechanisms.

BIBLIOGRAPHY

Campbell, Colin J., and Jean H. Laherrère. (1998). "The End of Cheap Oil." Scientific American March: 78–83. This article offers a solid, multi-tiered analysis predicting that oil production will peak within the next few years, leading to a dramatic increase in oil prices.

Costanza, Robert; Herman Daly; and Joy Bartholomew. (1991). "Goals, Agenda and Policy Recommendations for Ecological Economics." In Ecological Economics: The Science and Management of Sustainability, ed. Robert Costanza. New York: Columbia University Press. This chapter is an excellent brief introduction to the field of ecological economics.

Daly, Herman, and John J. Cobb, Jr. (1989). For the Common Good: Redirecting the Economy Toward Community, the Environment, and a Sustainable Future. Boston: Beacon Press. This award winning book remains one of the best and most complete introductions to ecological economics, and the first description of the index of sustainable economic welfare.

Funtowicz, Silvio O., and Jerome R. Ravetz. (1992). "Three Types of Risk Assessment and the Emergence of Post-Normal Science." In Social Theories of Risk, ed. Sheldon Krimsky and Dominic Golding. Westport, CT: Praeger. This chapter describes a general approach for solving ecological economic problems when facts are uncertain, decisions are urgent, stakes are high and values matter.

Georgescu-Roegen, Nicolas N. (1971). The Entropy Law and the Economic Process. Cambridge, MA: Harvard University Press. A classic work in ecological economics; the first comprehensive analysis of the importance of the entropy law to economics.

Gowdy, John. 1997. "The Value of Biodiversity: Markets, Society, and Ecosystems." Land Economics 73: 25–41. Presents a fine analysis of different types of value and clarifies the limits to monetary valuation.

Lomborg, Bjørn. (2001). The Skeptical Environmentalist: Measuring the Real State of the World.New York: Cambridge University Press. An influential but poorly researched example of the cornucopian world view that natural resources and waste absorption capacity are limitless, and the laws of thermodynamics are essentially irrelevant to economics.

Prugh, Thomas T.; Robert R. Costanza; and Herman H. E. Daly. (2000). The Local Politics of Global Sustainability. Washington, DC: Island Press. This short, readable book describes participatory democratic processes, and presents them as an effective mechanism for the sustainable and just allocation of resources.

Rennie, John. (2002). "Misleading Math about the Earth: Science Defends Itself against The Skeptical Environmentalist." Scientific American 286(1): 61. A brief editorial that introduces a series of articles describing the factual and analytical errors in Lomborg's The Skeptical Environmentalist.

Schneider, Stephen. (2002). "Global Warming: Neglecting the Complexities." Scientific American 286(1): 60–63. One in the series of articles introduced by John Rennie (see above).

Simon, Julian Lincoln. (1996). The Ultimate Resource 2, revised edition. Princeton, NJ: Princeton University Press. One of the first, best written and most influential descriptions of the cornucopian world view (see annotation following The Skeptical Environmentalist).

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Environmental Economics

Macmillan Encyclopedia of Energy
COPYRIGHT 2001 The Gale Group Inc.

ENVIRONMENTAL ECONOMICS

In dealing with environmental questions, economists emphasize efficiency, social welfare, and the need for cost accountability. A basic principle for efficiency is that all costs be borne by the entity who generates them in production or consumption. For example, production and consumption of diesel fuel will be socially inefficient if significant resulting costs are shifted to others who happen to be downwind or downstream from the refinery that makes the fuel or the truck that burns it. The benefits of making and using the fuel should exceed the cost—society at large—or else the process reduces total social welfare.

Information is the key to such internalizing "external costs." If the generator of pollution damage is known, along with the victim and the size of the damage, then the polluter can be held accountable. Historically, if wrongful damage is done, courts in the United Kingdom, the United States, Canada, and nations with similar legal systems have been willing to force compensation by polluters or, when the damage is great enough, to order cessation of the pollution. Small damage is ignored. But if no one knows whether the damage is serious, or who caused it, then regulation may be instituted to cope with it. However, since the regulator may not know more than courts could learn at trial, the results of regulation vary from increasing efficiency to reducing it. An analysis of the problems facing a regulator provides
context for examining the key issues in environmental economics.

Cost accountability will be most prevalent when property rights to land and resources are clearly defined. Clear property rights make the owners of a resource responsible, in most countries, for the way that resource is used and for the harms it may cause others. An owner's right to the use of property does not include the right to use it in ways that impose a cost on others. In such cases, courts have historically held owners of a polluting plant or business responsible for harm they may cause other parties. Clear property rights make owners face the cost of inefficient use of a resource and thus encourage owners to ensure that their property or equipment is put to the most highly valued use. Property rights provide what economists consider the incentives to ensure that resources are used efficiently (maximizing net value) and in a way that constrains negative impacts on other individuals.

When ownership rights are less well defined, or not easily defended, the incentives for resource owners to efficiently use resources in a safe, non–polluting way, are decreased or removed. Individuals are less likely to take expensive, time-consuming action to protect a resource that they do not own, and by which they are not directly affected financially. For instance, most landowners would be quick to take action to prevent garbage generated by a local business from piling up in their own backyard. However, they would be less likely to take actions to prevent the same business from polluting a nearby lake or river. The reason is that any one individual has less direct, or at least less obvious, interest in the lake or river, than they do in their own property—and usually less ability to affect the outcome.

This incentive problem is increased as the number of polluters and the number of land owners increase so that it is difficult to pinpoint specific incidents of pollution and their effect on individuals. The case of air pollution from cars and multiple factories is a classic example of this information problem. In a large metropolitan area, there are millions of automobiles and many factories that could contribute to air pollution. There are also millions of individuals who could be harmed by that pollution. But it is generally difficult, if not impossible, for one individual to identify a specific problem they have experienced due to air pollution and then to pinpoint the source of that problem. Such situations, where property rights are not well defined, as is the case with air, and where it is difficult to identify a particular source of pollution, often lead to calls for government regulations to prevent a certain activity, or to reduce a certain activity such as exhaust from automobiles, in an effort to prevent harm to others.

Just as in the decision-making process of individual land owners, incentives are important in the government decision-making process. Economists have identified a characteristic of the government decision-making process that can allow the concerns of special interest groups can take precedence over the interest of the general public. The principle of rational voter ignorance states that since the cost of obtaining information about political issues is high, and any individual voter is likely to pay a small portion of the cost as well as reap a small portion of the benefit of any government action, individual voters are not likely to take the time to become well informed on specific issues. In contrast, politically organized special interest groups, such as firms in a polluting industry, will pay a heavy price for any new regulations that might be directed toward them. Therefore, they have a financial incentive not only to be well informed on the issues affecting them, but also to spend time and money trying to influence the government to ensure that they do not bear the cost of regulations.

With strong incentives for businesses and other special interest groups, and weak incentives for individual voters, it is not surprising that many environmental regulations have often been less successful at preventing harm than the more traditional property rights-based approaches. Thus, while privately owned lands and resources are generally healthy and well preserved, many resources that are not owned, such as air or many waterways, are polluted.

Many economists have therefore become disappointed in the effectiveness of traditional regulatory solutions to environmental problems. They look to market incentives such as those provided by private property rights, and market-like mechanism, where polluters must bid for or trade for the right to release potentially harmful emissions, as policy alternatives.

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Environmental Economics

ENVIRONMENTAL ECONOMICS

As the entry on "Economics: Orientation" points out, welfare economics puts the "satisfaction of individual human desires at or near the top of its own internal moral hierarchy." Two economists observe, "The basic premises of welfare economics are that the purpose of economic activity is to increase the well-being of the individuals that make up the society, and that each individual is the best judge of how well off he or she is in a given situation" (Stokey and Zeckhauser 1978, p. 277).

Environmental economics builds on the theory of welfare economics (or microeconomics) and in particular the view—prepresented as an ethical theory—that the satisfaction of preferences taken as they come ranked by the individual's willingness to pay (WTP) to satisfy them is a good thing because (by definition) this constitutes welfare or utility. According to economist David Pearce (1998, p. 221), "Economic values are about what people want. Something has economic value—is a benefit—if it satisfies individual preferences." This approach uses maximum WTP to measure how well off the individual believes a given situation makes her or him. A representative text states, "Benefits are the sums of the maximum amounts that people would be willing to pay to gain outcomes that they view as desirable" (Boardman, Greenberg, Vining, et al. 1996).

Preference Satisfaction

The attempt to link preference satisfaction (and therefore WTP) with well-being or benefit, however, encounters four problems. First, one may link preference with welfare by assuming that individuals prefer what they believe will make them better off. Research has shown, on the contrary, that with respect to environmental and other policy judgments, people base their values and choices on moral principles, social norms, aesthetic judgments, altruistic feelings, and beliefs about the public good—not simply or even usually on their view of what benefits them. The basis of environmental values in moral principle, belief, or commitment rather than self-interest severs the link between preference and perceived benefit or welfare.

In recent decades, environmental economists have put a great deal of effort into developing methodologies for measuring the benefit associated with goods—sometimes called "non-use" or "existence" values—that people care about because of moral beliefs, aesthetic judgments, or religious commitments, rather than because of any benefit or welfare change they believe those goods offer them. According to economist Paul Milgrom (1993, p. 431), for existence value to be considered a kind of economic value, "it would be necessary for people's individual existence values to reflect only their own personal economic motives and not altruistic motives, or sense of duty, or moral obligation." The difference between what people believe benefits them (economic motives) and what they believe is right (moral obligation) divides economic value from existence or non-use value. The attempt to translate moral beliefs and political judgments into economic benefits—principled commitments into units of welfare and thus into data for economic analysis—may continue to occupy economists for decades to come, because many logical, conceptual, and theoretical conundrums remain.

Second, the statement that the satisfaction of preference promotes welfare states a tautology if economists define "welfare" or "well-being" in terms of the satisfaction of preference, as generally they do. Concepts such as "welfare," "utility," and well-being" are mere standins or proxies for "preference-satisfaction" and so cannot justify it as a goal of public policy.

Additionally, if "well-being" or "welfare" refers to a substantive conception of the good, such as happiness, then it is simply false that the more one is able to satisfy one's preferences, the happier one becomes. That money (or income—a good surrogate for preference satisfaction) does not buy happiness may be the best-confirmed hypothesis of social science research. Thus, the thesis that preference satisfaction promotes welfare appears either to be trivially true (if "welfare" is defined as preference satisfaction) or empirically false (if "welfare" is defined as perceived happiness).

Third, if preferences are mental states, they cannot be observed. If they are inferred or "constructed" from behavior, they are also indeterminate, because there are many ways to interpret a person's actions as enacting a choice, depending on the opportunities or alternatives the observer assumes define the context. For example, the act of purchasing Girl Scout cookies could "reveal" a preference for eating cookies, supporting scouting, not turning away the neighbor's daughter, feeling good about doing the right thing, avoiding shame, or any of a thousand other possibilities. Choice appears to be no more observable than preference because its description presupposes one of many possible ways of framing the situation and determining the available options.

Fourth, few if any data indicate maximum WTP for any ordinary good. When one runs out of toothpaste, gets a flat tire, or has to buy the next gallon of milk or carton of eggs, one is unlikely to know or even have an idea about the maximum one is willing to pay for it. Instead, one checks the advertisements to find the minimum one has to pay for it. It is not clear how economists can estimate maximum WTP when all they can observe are competitive market prices. Competition drives price down to producer cost, not up to consumer benefit. For example, one might be willing to pay a fortune for a lifesaving antibiotic, but competition by generics may make the price one actually pays negligible.

The difference between price and benefit is clear. People usually pay about the same prices for a given good no matter how much they differ in the amount they need or benefit from it. People who benefit more and thus come first to the market may even pay less, for example, for seats on an airplane than those who are less decided and make later purchases. Thus, maximum WTP, which may correlate with benefit, cannot be observed, while market prices, which can be observed, do not correlate with benefit.

Market Prices

Environmental economists also propose that the outcome of a perfectly competitive market—one in which property rights are well defined and people do not encounter extraordinary costs in arranging trades and enforcing contracts—defines the way environmental assets are most efficiently allocated. Market prices constantly adjust supply and demand—the availability of goods to the wants and needs of individuals. As the "Orientation" entry observes, a perfectly competitive market may be used to define the idea of economic efficiency—the condition in which individuals exhaust all the advantages of trade because any further exchange would harm and thus not gain the consent of some individual.

Economists often explain the regulation of pollution not in moral terms (trespass, assault, violation of rights or person and property) but in terms of the failure of markets to "price" goods correctly. Suppose for example a factory emits smoke that causes its neighbors to bear costs (such as damage to property and health) for which they are not compensated. The factory, while it may pay for the labor and materials it uses, "externalizes" the cost of its pollution. When only a few neighbors are affected, they could negotiate with the factory, either paying the owner to install pollution-control equipment (if the zoning gave the factory the right to emit smoke) or by accepting compensation. The factory owner and the neighbors would bargain to the same result; the initial distribution of property rights determines not the outcome but the direction in which compensation is paid. This is an example of the second theorem described in the "orientation" entry, according to which the initial distribution of goods and services does not really matter in determining the outcome of a perfectly functioning market.

Where many people are affected, as is usually the case, however, the costs of bargaining ("transaction costs") are large. Economists recommend that the government tax pollution in an amount that equals the cost it "externalizes," that is, imposes on society. The industry would then have an incentive to reduce its emissions until the next or incremental reduction costs more than paying the tax—the point where in theory the cost (to the industry) of reducing pollution becomes greater than the benefits (to the neighbors). Such a pollution tax would "internalize" into the prices the factory charges for its products the cost of the damage its pollution causes, so that society will have the optimal mix of those products and clean air and water.

Many economists point out, however, that the government, in order to set the appropriate taxes or limits, would have to pay the same or greater costs as market players to gather information about WTP for clean air or water and willingness to accept (WTA) compensation for pollution. Pollution taxes, to be efficient, "should vary with the geographical location, season of the year, direction of the wind, and even the day of the week ..." (Ruff 1993, p. 30). The government would be "obliged to carry out factual investigations of mind-boggling complexity, followed by a series of regulatory measures that would be both hard to enforce and valid only for a particular, brief constellation of economic forces" (Kennedy 1981, p. 397). Thus, regulation is unnecessary when transaction costs are small (because people can make their own bargains) and unfeasible when they are great (because the government would have to pay them).

By arguing that emissions be optimized on economic grounds—rather than minimized on ethical grounds—economists reach an impasse. According to Ronald Coase, "the costs involved in governmental action make it desirable that the 'externality' should continue to exist and that no government intervention should be undertaken to eliminate it"(1960, p. 25–26).

Maximum WTP

Economists regard the ubiquitous and pervasive failure of markets to function perfectly as a reason that society, in order to achieve efficiency, should transfer the power to allocate resources to experts, presumably themselves, who can determine which allocations maximize benefits over costs. By replacing market exchange with expert opinion to achieve efficiency, however, society would sacrifice many non-allocatory advantages of the market system. For example, by making individuals responsible for decisions that affect them—rather than transferring authority to the government to act on their behalf—markets improve social stability. People have themselves, each other, or impersonal market forces to blame—not the bureaucracy—when purchasing decisions do not turn out well for them.

Economists have encountered logical and conceptual hurdles, moreover, in their efforts to develop scientific methods for valuing environmental assets and thus for second-guessing market outcomes. First, there is little evidence that economic experts are able to assemble information about WTP and WTA any better than market players when the costs of gathering that information are high. Second, economic estimates of benefits and costs when made by government agencies become objects of lobbying, litigation, and criticism. Experts can be hired on both sides of any dispute and then produce dueling cost-benefit analyses (Deck 1997). Third, when society transfers power to scientific managers, even if they are trained welfare economists, it courts all the problems of legitimacy that beset socialist societies, which likewise may rely on scientific managers to allocate resources.

Institutional Approaches

Pollution control law, from a moral point of view, regulates pollution as a kind of trespass or assault, on analogy with the common law of nuisance. Statutes such as the Clean Air Act and Clean Water Act, moreover, explicitly rule out a cost-benefit or efficiency test and pursue goals such as public safety and health instead (Cropper and Oates 1992). For this reason, the government often limits to "safe" levels the maximum amount of various pollutants industries and municipalities may emit into the water and air. To determine what levels are "safe enough" legislators and regulators have to consider the state of technology and make ethical and political judgments. To help society attain the mandated levels in the most cost-effective ways, economists have made an important contribution to environmental policy by urging government to create market-like arrangements and thus to generate price signals for allocating environmental goods for which markets do not exist.

For example, the Environmental Protection Agency, by creating pollution permits or allowances that firms can buy and sell under an aggregate total ("CAP"), gave industries incentives to lower emissions of lead, smog, and other pollutants to below permitted levels, because they could sell at least part of the difference to other companies that find emissions more expensive to reduce. Tradable rights in environmental assets (from emission allowances to rights to graze the public range) show that incentives matter; marketable permits can reduce pollution more effectively and at lower cost than "command and control" policies. In addition, market arrangements decentralize decisions by encouraging industries to make their own bargains to attain the overall "CAP" rather than to conform to one-size-fits-all regulation.

Environmental economics has enjoyed success in helping society construct market-like arrangements for achieving in the most cost-effective ways environmental goals, such as pollution-reduction, justified on moral, political, and legal grounds. Environmental economics as a discipline has been less successful in finding scientific methods to second-guess or replace markets in order to achieve goals it itself recommends, such as preference-satisfaction or efficiency, that are not plainly consistent with moral intuitions, legislation, or common law traditions.

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